Charles River Laboratories International, Inc. CRL is likely to grow in the coming quarters, backed by the prospects of the DSA (Discovery and Safety Assessment) segment. Service offerings of the RMS (Research Models and Services) business continue to be in high demand among the company’s clients in the field of basic research and screening of non-clinical drug candidates. A stable solvent balance sheet buoys optimism.
However, the company’s operations are subject to the uncertain impacts of macroeconomic conditions and intense competition from other players in the industry.
In the past year, this Zacks Rank #3 (Hold) stock has declined 5% compared with the 11.5% fall of the industry and a 16.8% rise of the S&P 500 composite.
Operating as a full-service, early-stage contract research organization, Charles River has a market capitalization of $10.34 billion. The company has an earnings yield of 5.24% against the industry’s -1.69% yield. CRL surpassed estimates in all the trailing four quarters, delivering an average earnings surprise of 8.43%.
Let’s delve deeper.
Upsides
DSA Arm Continues to Thrive: CRL is gaining from its extensive expertise in the discovery of preclinical candidates and the design, execution and reporting of safety assessment studies for numerous types of compounds, including cell and gene therapies, and small and large molecule pharmaceuticals. The demand for these services is driven by the needs of large global pharmaceutical companies that continue to transition to an outsourced drug development model, in addition to mid-size and emerging biotechnology companies, industrial and agrochemical companies and non-governmental organizations that rely on outsourcing.
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In the third quarter, the organic revenue growth of 5.3% was mainly driven by broad-based growth in the Safety Assessment business on contributions from base pricing and study volume.
RMS Business Rebounds: The RMS segment continues to benefit from broad-based growth in all geographic regions for small research models. Through 2023, the company has been witnessing strong growth within the insourcing solution business led by the CRADL (Charles River Accelerator and Development Labs) initiative.
Global biopharmaceutical companies, small and midsized biotechs and academic and government accounts continue to make significant contributions to the growth rate. CRL is now focused on ramping up the utilization of the new sites and continuing to add new sites. This will generate a runway for continued robust revenue growth and margin enhancement opportunities for CRADL.
Stable Solvency Structure: Charles River exited the third quarter of 2023 with cash and cash equivalents of $157 million compared with $200 million at the end of the second quarter. Meanwhile, the total debt was $2.51 billion compared to $2.68 billion at the end of the second quarter. Although the third quarter’s total debt was much higher than the corresponding cash and cash equivalent level, the company has no short-term payable debt on its balance sheet. This is good news in terms of the company’s solvency position, particularly during the economic downturn.
Downsides
Macroeconomic Condition: A significant chunk of Charles River’s RMS and DSA revenues is generated in China. Any trade policy-related conflict between the United States and China may accordingly hamper the company’s business developments in this region.
Further, the Manufacturing Solutions segment is experiencing softness across broader end markets, which, according to the company, is due to a post-COVID-19 slowdown from biopharma manufacturers, CDMOs and their suppliers. These market conditions started to impact the Microbial Solutions business more noticeably in the third quarter of 2023.
According to Charles River, for Microbial Solutions, the global biopharma demand environment is affecting the Endosafe endotoxin testing product line as clients are reducing both testing volumes and investments in new instruments.
Competitive Landscape: Charles River competes in the marketplace based on its therapeutic and scientific expertise in early-stage drug research, quality, reputation, flexibility, responsiveness, pricing, innovation and global capabilities. The company primarily faces a broad range of competitors of different sizes and capabilities in each of its three business segments. This fiercely competitive global market impacts the company’s market capitalization scenario.
Estimate Trend
The Zacks Consensus Estimate for CRL’s earnings has moved up from $10.49 to $10.56 in the past 30 days.
The Zacks Consensus Estimate for the company’s 2023 revenues is pegged at $4.10 billion, suggesting a 3.2% increase from the year-ago reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Haemonetics HAE, Insulet PODD and DexCom DXCM.
Haemonetics has an estimated earnings growth rate of 28.4% for fiscal 2024 compared with the industry’s 15.3%. HAE’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 16.1%. Its shares have decreased 1% compared with the industry’s 2.2% fall in the past year.
HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Insulet, sporting a Zacks Rank #1 at present, has a long-term estimated earnings growth rate of 39.2% compared with the industry’s 11.7%. Shares of the company have decreased 36.3% compared with the industry’s 2.2% decline over the past year.
PODD’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 105.1%. In the last reported quarter, it delivered an average earnings surprise of 77.5%.
DexCom, carrying a Zacks Rank #2 at present, has an estimated long-term earnings growth rate of 33.6% compared with the industry’s 13.8%. Shares of DXCM have increased 1.2% against the industry’s 3.4% decline over the past year.
DXCM’s earnings surpassed estimates in all the trailing four quarters, the average surprise being 36.4%. In the last reported quarter, it delivered an average earnings surprise of 47.1%.
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